BMS Breaks Free from the Captivity of an Inefficient Insurance Structure

Bristol Myers Squibb (BMS) is a biopharmaceutical company headquartered in Princeton, New Jersey, that delivers innovative medicines to patients around the world. Its prescription drugs and biologics treat diseases including cancer, HIV/AIDS, cardiovascular disease, diabetes, and rheumatoid arthritis.

Like most large organizations, BMS faces risks across a wide range of exposures, and its corporate insurance team is charged with protecting the company’s operations, employees, and patients from fallout related to those risks. Over the years, BMS built—and inherited through acquisition—captive insurance companies that covered organizational risks ranging from property damage after a natural disaster to patient injury in clinical trials to business interruption resulting from a cyberattack.

“Our insurance group has three main objectives,” says Wayne Cheng, director of corporate insurance, treasury. “First, we aim to protect our patients, employees, and company reputation. Second, we want to manage policies to optimize operational excellence and reduce costs whenever possible. And finally, we use insurance to transfer the risk of catastrophic events that might impact the company.”

For years, BMS reached these goals by running two captive insurers in Ireland and one in Bermuda. As new insurance regulations came into effect in the mid-2010s, including the European Union’s (EU’s) Solvency II requirements, the captives’ costs skyrocketed. “The economics of owning the captives shifted, as each captive now faces a much higher capital requirement,” Cheng says. “So each captive needs to hold more assets in cash to support its liabilities. On top of that, each captive also needs to comply with more rigorous financial reporting.”

BMS’s risk management staff found themselves spending more and more time satisfying audits and compliance reviews. “Some essential BMS employees were sitting on the boards of the captives, which required them to go through many hours of regulatory training and meetings as local laws changed,” Cheng says. “The resources required to maintain three captives began to outweigh the benefits.”

The BMS insurance team launched an initiative to explore alternative approaches for managing corporate risk. This process involved a holistic review of the company’s insurance portfolio, including commercial insurance solutions. Through this process, they identified three options: continue business as usual with the three captives, consolidate the captives, or sell the Irish captives.

They completed a financial pro forma of five years, with assumptions that general and administrative (G&A) costs would grow by at least 2 percent annually and that the company would incur one-time costs if it consolidated or sold the captives. “We conducted a risk assessment and received input from many cross-functional groups, including BMS’s legal and tax departments, as well as the technical accounting and business control teams,” Cheng says. “The treasury and risk management groups drove this risk assessment. We articulated the options for the company, highlighting the benefits and challenges of each option.”

After weighing the pros and cons of each option, the team chose the full sale of the Irish captives, with the buy-in of the organization as a whole. They decided to sell the Irish captives to repatriate surplus capital and enhance the company’s long-term efficiencies. In addition to the sale, the team expected the Irish Captive Exit, or ICE, project to protect BMS’s reputation by enabling the company to retain control of insurance claims after completion of the project.

“Our goal was to enhance efficiencies by centralizing all our captive insurance operations in our Bermuda entity,” Cheng explains. “Our Irish captives had no physical assets, offices, or employees, but we began to look for a buyer that would want to purchase our captive license to sell and distribute insurance in Ireland.”

The insurance group engaged a consulting firm to initiate the tender process. They issued a market offer letter to gauge interest from third parties in purchasing the Irish captives. When a potential buyer expressed interest, BMS began discussions to align expectations with the prospective buyer and collaborated with internal and external partners to complete the ICE project. Ultimately, BMS sold the Irish captives to a third party and initiated loss policy transfer (LPT) reinsurance contracts that transferred the identified insurance obligations and liabilities from both Irish captives to the Bermuda captive, specifying that Grove Insurance would provide claims processing. These reinsurance contracts ensured that all past insurances and liabilities written by the BMS Irish captives were transferred to the Bermuda captive.

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“These agreements were important because BMS’s reputation depended on us not transferring any handling of insurance claims to a third party as part of this initiative,” Cheng says. “With the reinsurance issued to the captive, we retained all the prior risk and control within BMS via our Bermuda captive.”

The insurance team acquired an actuarial assessment of BMS’s insurance obligations and liabilities. The resulting report provides an arm’s-length assessment of the adequacy of insurance premiums being transferred to Bermuda through the LPT agreement. This report was essential to receiving approval from the Central Bank of Ireland for the captives’ sale.

Ultimately, the ICE initiative eliminated the G&A costs of BMS’s Irish captives, since the buyer assumed the costs of maintaining Solvency II standards, external audits, and management fees associated with both Irish captives. The corporate treasurer and directors who served on the Irish captives’ boards freed up a great deal of time that they previously spent in audits, meetings, and travel. Plus, the BMS insurance team gained a consolidated view of their captive insurance operation. With the LPT reinsurance contracts, they can now manage all their past, current, and future captive insurance policies through the single Bermuda captive.

Cheng emphasizes that although the unwinding of the Irish captives required intensive effort on the part of his team and others within BMS, it was well worth the effort. “One of the values that is very ingrained within our company is optimizing operations so that we can best serve our patients,” he says. “Having three different insurance captives was not contributing value to our company mission. And since we are an innovative company, we do not just accept business as usual.

“Like any complex project in a large company, the ICE initiative involved a significant time commitment,” he continues. “If I were speaking to another risk manager launching a similar project, I would say that however long you think a certain part of the project will take, take that time and double it. But overall, this project is a great example of the company culture here at BMS. We strive to improve and innovate in every area of the business.”